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“Carbon pricing is a socially feasible instrument”

says Felix Matthes, research coordinator for energy and climate policy at the Oeko-Institut. He believes it is vital for the structural transformation to avoid sudden and dangerous breaks with the past.

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new energy: In the recent coalition talks between the CDU/CSU and the SPD, Germany’s climate target of cutting greenhouse gas emissions by 40 percent in relation to 1990 levels by 2020 was deemed unachievable, and deferred until the “early 2020s”. Does this signal a departure from the Paris agreement by Germany?

Felix Matthes: The Paris agreement expresses a very long-term vision, so the question cannot yet be answered in the wake of these coalition talks. The agreement’s overarching goal is to keep global warming significantly below 2C in relation to pre-industrial levels. In other words, what matters is not achieving particular carbon reduction targets by particular deadlines, but the overall amount of carbon dioxide released into the atmosphere over time. This means that we need to cut emissions as soon as possible to avoid quickly using up our remaining budget and allow ourselves a certain degree of flexibility in the transition to full decarbonisation in the medium and long term. The coalition talks do indicate that Germany is not on course to shoulder its fair share of the responsibility to reduce emissions.

ne: Would a Jamaica coalition [CDU/CSU, FDP and Greens] have been any better in this regard?

Matthes: No. The difference was as follows: the outcome of the Jamaica negotiations was perhaps too concerned with the steps to be taken by 2020, and not enough with the subsequent roadmap towards 2030 and 2050. The focus was primarily on getting emissions back on track in the short term. In the latest talks it was the other way around: in my opinion, enough importance was given to the targets for 2030, but not to those for 2020.

ne: Can you be more specific: what was right about the agreement reached between the CDU/CSU and the SPD?

Matthes: First of all, it provides confirmation that the Climate Action Plan remains central to the agenda. A 55 percent reduction in carbon emissions by 2030 is a relatively ambitious goal for Germany. Accordingly, I think it is positive that the renewables expansion targets are to be brought forward and increased from 60 to 65 percent of the electricity mix. I also welcome the plans to hold special auctions for the three main sources of renewable energy: onshore wind, offshore wind and PV.

ne: And what do you think is missing in the plans?

Matthes: Aside from the expansion of renewables, the plans do not mention any other practical measures that could have a real impact on emissions. Germany is in the paradoxical situation of having enjoyed remarkable success in the deployment of green energy, while at the same time failing to bring down carbon emissions. A detailed plan to reduce emissions is something the talks failed to address. For a long time now, we have had no shortage of targets – but there is a lack of concrete policies to achieve them.

"We have no shortage of targets – but there is a lack of concrete policies to achieve them."

ne: This seems all the more worrying given that in her recent election campaign, Ms Merkel was still promising to meet the 2020 target – only to give up on it a few weeks later…

Matthes: On one hand, this is indeed a disastrous signal. On the other, is has been plain to see for a while now that it would be very difficult to meet the 2020 targets, and that at this stage it would only be possible by recourse to drastic measures in the electricity sector, by which I mean first and foremost a major shift away from coal power. From the perspective of climate action, the first wave of coal plant closures would have to go much further than the seven gigawatts (GW) apparently agreed on in the Jamaica coalition talks.

ne: So would a decisive coal phase-out still have been enough to meet the 2020 targets, or was Chancellor Merkel’s promise effectively unachievable in any case?

Matthes: We ran extensive calculations at the Oeko-Institut: if we were to halve our coal capacity, it would theoretically be possible to make the necessary carbon savings. However, this would require rapid and comprehensive complementary measures to safeguard security of supply. In other words, we would have to bring about a high degree of demand-side flexibility in a very short period of time, not to mention building a large number of new gas-fired power plants. In my opinion, there would not have been enough political capital to achieve this in the current climate. What is more, every month of hesitation diminishes our remaining leeway for action. The proposition is therefore probably an impossible one for any government right now, even though it is technically doable.

ne: What do you think is the real problem?

Matthes: I believe that the procrastination we are seeing in climate action is symptomatic of a problem that has plagued us for a number of years: we have been using targets as a substitute for policy. We keep on setting targets while doing less and less to implement them. The postponement of the 40-percent target is an example of this. The target was not abandoned altogether, but put off until the early 2020s – i.e. the next legislative period. It is all too likely that we will see another fantastic target being set, only to realise three years before the deadline that implementation has failed.

ne: So what needs to be done?

Matthes: In addition to targets, we also need to define longer-term action strategies. An example of an action strategy is the expansion of renewables. This is an area in which we are, to some degree, on the right track. A second strategy might be organising the phase-out of coal-fired power plants. A third strategy: adapt, expand and increase the capacity of electricity grids. A fourth: promote innovations in such a way that they are operational when they are needed. As far as this kind of strategy is concerned, we have a fundamental deficit. But without guiding strategies, we will come no closer to finding appropriate and flexible instruments. The idea that if we somehow introduce enough renewables into the system everything else will follow on naturally is a fatal error in my opinion.

ne: But these strategies would have to endure beyond the end of this legislative period…

Matthes: Of course, in a democracy everything is liable to change after the next election. But we need to create the right conditions to enable market participants to focus on a particular course of action. And once we have made a sufficient commitment to this or that action strategy, we are much less likely to abandon it altogether than to make the necessary changes to carry on pursuing it.

ne: You say that the coal phase-out is an indispensable component of the strategies that we must adopt. Does this mean that the SPD needs to completely overhaul its stance on this issue?

Matthes: Yes, the party is going to have to reinvent itself in this regard. There are factions within the SPD that share this view. But part of the SPD remains hostage to the coal industry and the coal unions. That said, the problem is not exclusive to the SPD. Ever since various state premiers took it upon themselves to protect the miners, it has been an issue for the CDU as well. But ultimately, no party can escape the fundamental question: to what extent can structural change be shaped? Can things go on indefinitely, or are profound breaches with the past simply unavoidable?

ne: What is your view as far as the coal phase-out is concerned?

Matthes: My prediction is that the lignite industry will have a “Wackersdorf moment” of its own. Right now, it is clear that Germany’s lignite regions are not earning as much as they need to be. It is only a matter of time before operators start to shut down parts of their mining operations. With the nuclear reprocessing plant in Wackersdorf, politicians stood behind the project for years in spite of all the public protests, until the companies finally decided they had had enough. I believe that exactly the same thing will happen in the mid-2020s with lignite. The operators running the mines in Lusatia, like the Czech company EPH, are ruthless financial investors. As soon as they realise that there are no more profits to be made, they will simply tell the government: “We’re done, you can take care of the wind-up now.”

ne: So they’re heading towards the shift with their eyes wide open…

Matthes: Exactly. For the climate, it doesn’t matter what form the transition takes, but for the employees and the affected regions, abrupt transformations of this sort are a catastrophe.

ne: What do you think is a sensible strategy for a coal phase-out that is both environmentally sound and socially responsible?

From a climate perspective, we need to decommission a substantial volume of lignite capacity. To make this palatable for the local population, once the phase-out has been decisively initiated, we need a roadmap towards zero coal by around 2035. It is vital that we resist the temptation to do nothing until 2028, and then expect everything to just fall into place. That won’t work, and will only drive up the cost of the transition.

ne: Is there a need for more state intervention here, or can the transition be driven by market forces alone?

Matthes: The climate problem is certainly not going to simply resolve itself. What we need are guide rails put in place by society, i.e., the state. These guide rails might include carbon pricing, a roadmap for the coal phase-out, an expansion corridor for renewables, or binding energy efficiency guidelines. Measures of this sort need to be stronger than they are today. But within the guide rails there also needs to be more room for market forces. Right now, we are creating an extremely coordination-intensive system. For almost a hundred years, electricity supply in Germany has been based on 300 power plant units, whereas in the future it will comprise millions of generators and flexible consumers. I don’t see how such a complex system can be coordinated in any other way than using the information content of prices – in other words, with market mechanisms.

ne: But couldn’t coordination based on prices fuel resentment among consumers, lowering acceptance for the transition? We have seen critics repeatedly seek to pit climate action and social responsibility against each other, e.g. by highlighting the increase in electricity costs resulting from the energy transition.

Matthes: That’s a specious argument. Electricity costs still only make up 2.5 percent of private consumer spending. We have functioning social security systems that step in in cases of hardship. What is more, even if we hadn’t expanded renewable capacities in recent years, we would nevertheless have had to invest in the energy system. Every scientific study on the subject reaches the same conclusion: whichever route we take to secure our energy supply, the cost will work out roughly the same. However, every other system has the minor setback of being associated with extensive carbon emissions or a high level of risk. Therefore, it is unreasonable to speak of a lack of social sustainability in connection with the energy transition in the long term.

ne: But the technological transformation has incurred costs…

Matthes: Yes, Germany has had to invest in the development of technologies, and this makes up almost half of the current EEG surcharge. Together with China, we have brought down the cost of PV for the rest of the world. This is also true of offshore and to some extend onshore wind. The US and China are currently doing the same for batteries. We are a wealthy country, and we can afford to spend this money – and in light of our high greenhouse gas emissions, we have a responsibility to do so.

ne: Have we developed the right mechanisms to finance the energy transition? Numerous exemptions to the EEG surcharge are granted to industry, whereas all other consumers have to pay it, regardless of their financial circumstances…

Matthes: Subsidising the industry’s energy costs is an industrial policy decision that you can agree or disagree with. But even with such imbalances in the system – and they undoubtedly exist – the burden on individual entities has always been tolerable in my opinion.

ne: Nevertheless, electricity prices are going up, which threatens acceptance for the energy transition. How might the transition be designed to avoid alienating citizens?

Matthes: When we speak of “citizens” we need to distinguish between citizens as voters, citizens as taxpayers, and citizens as participants or investors. I think that among citizens as voters, acceptance for the energy transition – regardless of its cost – would be higher if the whole enterprise had actually succeeded in reducing the country’s carbon emissions. This is the energy transition’s Achilles heel, politically speaking.

As for the additional costs borne by citizens, I think we will soon be over the worst. The EEG surcharge has reached a plateau, and won’t get much higher. One area in which there is still perhaps some potential for indignation is grid fees. But it simply doesn’t make sense to argue about individual items – what we need to keep in sight is the cost of the overall system. Regardless of whether we use conventional or renewable power sources, the overall cost of electricity is always around twelve eurocents per kilowatt hour (kWh) plus taxes and charges. This is the amount that must be paid to cover the full cost of generation and grids, and it can’t be done with the three eurocents currently on offer on the electricity exchange.

ne: But how do you propose to persuade people of this? How would you counter the argument that “the energy transition is not socially equitable”?

Matthes: To begin with, I would insist that the costs of our electricity system must be covered by the prices charged to consumers. This leaves the question of what other costs are incurred on top, such as innovation costs and the cost of the technological transition. It is possible that these costs could be covered in a more socially equitable manner from the national budget. But we need to be careful here. In the social justice debate, there are some voices in favour of passing on part of the costs of electricity that do not fall under special expenses, such as marketable investments, to the national budget. This must not happen – the cost of providing a good must be paid by consumers. Otherwise, we could end up with a situation in which people are demanding that the state pay for their bread rolls, or their car.

ne: But at the moment, all the taxes and charges mean that consumers are paying much more than they have to for electricity just to keep the system going…

Matthes: Yes, this is how I see it right now: generation costs are currently around six or seven eurocents per kWh of electricity. Three eurocents are covered by the electricity exchange price. This leaves three eurocents to be refinanced, for instance via the EEE surcharge and other fees. On top of this are grid costs. The remainder of the electricity price is negotiable. So right now I would allocate half of the EEG surcharge to investment which must be borne by the system. On top of this is the other half, plus everything else, such as the electricity tax. Here we can talk about other, more equitable distribution mechanisms.

"An area in which there is still potential for indignation is grid fees.”

ne: One approach under discussion is the introduction of a carbon tax or a pricing scheme for carbon emissions. For this kind of measure, should we be thinking about how to soften the blow in social terms?

Matthes: I think that makes sense. At the Oeko-Institut we are looking into how high a minimum price for carbon emissions would have to be. According to our calculations, EUR 25 to 30 per tonne would be a reasonable starting point, preferably in collaboration with France and the Netherlands. This would increase the electricity exchange price by roughly two eurocents. 40 percent of that would be offset by the fact that the EEG surcharge would fall in the wake of the rising exchange price. In other words, only 1.2 eurocents would be passed on to the consumer. To compensate for that, we would have to reduce the electricity tax by around half. Doing away with the electricity tax altogether in connection with carbon pricing would actually result in lower consumer prices. Accordingly, carbon pricing is a socially feasible instrument.

ne: Might it not make more sense, socio-politically speaking, to allow people a greater stake in the profits from energy generation?

Matthes: That brings us to “citizens as investors”. If we’re honest, this option has so far only been available to certain sections of the population – wealthier ones, to be specific. But we should introduce enough freedom and flexibility into our energy system to allow citizens to be involved if they choose. In fact, parts of the renewables sector are already moving away from the realm of investment goods and becoming consumer goods instead: anyone building a house these days will soon realise that a rooftop solar installation costs less than the bathroom fittings. People are investing their extra cash in wind farms. This should continue to be possible. The energy system is becoming less centralised and more diverse. Participation opportunities must be designed to be equally flexible if citizen energy is to work.

ne: But the latest amendments to the Renewable Energy Sources Act (EEG) are having a very different effect. The introduction of auctions as opposed to fixed remuneration for every kWh generated threatens to substantially reduce opportunities for participation by members of the community.

Matthes: The mistake was that the new regulations were not thoroughly thought through in terms of the needs of those involved. If we want citizens to participate in wind energy, we need to bear in mind that they will only be taking part in individual projects, and are somewhat averse to large upfront payments. They don’t have the financial means to invest large sums in projects for which approval has yet to be granted. Accordingly, rather than auctioning projects, it would have made more sense to allocate funding rights.

ne: How would that work?

Matthes: Rather than auction funding, or guaranteed remuneration, for a particular project, you auction funding for an as yet unspecified project, that must go online by the year x. These funding rights can be acquired in auction even if you don’t have a project. On one hand, rights would presumably continue to go to market players with large project portfolios and therefore the necessary financial flexibility. On the other, it opens the door to intermediaries, allowing smaller players to buy funding rights. This would probably cost them an extra 0.1 or 0.2 eurocents, but it would provide crucial flexibility. Investors would be able to choose the precise moment at which they want a solid financial commitment, according to their own particular needs, and buy the funding rights then. As things currently stand, the time of purchase is essentially determined by an inflexible citizens’ energy regulation, in auctions. That can’t work out well.

ne: So the EEG needs a fundamental rethink?

Matthes: Yes, I believe we need to think about the energy transition more in terms of phases. In an initial phase, which is all about ensuring take-off, you need very comfortable conditions – not just to support renewable energy itself, but also to create the non-technological infrastructure: project developers, engineering firms, financial backers or specialist law firms. The EEG in its original form was very well suited to this purpose. What we missed in Germany was the right moment to organise the shift to the second phase, in which coordination plays a greater role. This phase was then foisted upon us by the EU. And the structures we are creating now will no longer be appropriate in a world moving from 70 to 100 percent renewable electricity, which will be massively storage-intensive. Accordingly, I think we need another parliamentary committee in the Bundestag to think very carefully about these longer-term structures. At the moment, we’re just drifting from one reform of the EEG to the next. We tinker with parts of the legislation according to the latest demands from the EU or the current political balance of power, but we lack a unifying thread. If we don’t ask ourselves what is really important in each phase, we risk losing our way.

ne: Where do you think we are at greatest risk of going astray?

Matthes: Let us consider the example of power-to-gas, the process of using electricity to generate synthetic methane currently being touted as an alternative to grid expansion and energy efficiency measures. For one thing, the cost of this technology is not yet clear: if you want to generate methane in a climate-neutral way, the carbon emitted must come from biomass, which is a limited resource. Alternatively, the carbon emissions can be captured from the atmosphere, but that remains prohibitively expensive. Furthermore, we can’t be sure that there will really be enough green electricity available for methane synthesis. Calculations for power-to-gas always assume large amounts of excess wind power, but an important question is when this electricity will actually be available. If there is only a surplus for 500 or 1000 hours a year and the power-to-gas plants stand idle for the rest of the time, then the investment simply doesn’t make sense in this phase of the energy transition. We should be researching and comprehensively testing the technology so that it is available as an option in the next phase – after 2030, when there are even more renewables in the system – but for now it is a joker. And a joker should never be mistaken for a trump card.

ne: But isn’t it short-sighted to think in terms of phases? Don’t we need bolder visions such as the long-term goal of a world powered by 100 percent renewables in order to really get anywhere?

Matthes: Yes, of course we need visions of this sort. And I absolutely believe that long-term goals are still extremely important. Any predictions we make now about 2050 must involve considerable uncertainty, but even if we don’t know what the energy system will look like in detail, we can still describe it in structural terms, for instance as capital-intensive, infrastructure-intensive, coordination-intensive and more decentralised. This allows us to form some conclusions about what we should be doing today to minimise the risk of going down a completely wrong path. Every risk manager needs a long-term perspective, and the energy transition cannot succeed without risk management.

"Every risk manager needs a long-term perspective.”

ne: So we do have to be visionaries to a certain extent…

Matthes: The problem with visionaries is that they know exactly where they want to go, but tend not to care so much about where they started out or what steps are needed to get there. Accordingly, I see myself more as a “transformationary”: I think it is very important not to lose sight of our starting point, or which phases and steps will enable us to reach our goal. China’s president Xi Jinping quoted a very fitting expression for this approach: “crossing the river by feeling the stones”. The idea is that in order to cross a river, we need to have a clear view of the far bank, but it is equally important to feel our way so as to decide which stone to step on next.”

ne: What would you say is a particularly important step in the phase we are in now, aside from the coal phase-out and the expansion of renewables we discussed earlier?

Matthes: We must press ahead with grid expansion. We need the flexibility this will provide: the areas available to us for deployment of renewables are severely limited. We therefore need transmission lines to get clean electricity to those parts of the country where not so much is being generated. Otherwise, the energy transition will remain politically vulnerable. If we don’t expand our grids, we will effectively be giving local authorities the power to veto the energy transition project by blocking renewable energy installations in their region.

ne: One of the outcomes of the grand coalition talks was a commitment to pass a climate action law in the next legislative period. What is the right approach to make sure that besides just setting targets, something is actually done to ensure they are met?

Matthes: The UK is a good example of how this could work. The implementation difficulties that we have experienced so far are partly due to the fact that targets are always the responsibility of the environment ministry, whereas actual measures are designed in the economics and transport ministries. In the UK, each ministry is allocated a five-year carbon emissions budget, which it is legally obliged to adhere to or face sanctions. We could do the same thing here in Germany. There would have to be a kind of checklist, ideally laid out in the text of the law, against which the ministries’ achievements in the various strategic areas – such as the coal phase-out or grid expansion – could be verified every two years. Ministries failing to stick to the schedule would face sanctions.

ne: That sounds like it would lead to more of the same interminable wrangling over responsibility. Do you still have hopes for timely climate action? Can global warming really be kept below 1.5 or 2C?

Matthes: As far as 1.5C is concerned, I’m no longer so sure. To achieve this we would have to capture massive amounts of carbon dioxide from the atmosphere using biomass and new technologies, and then somehow store a substantial amount of it underground. That will be difficult. But I am still convinced that the 2-degree target is still within reach with a rapid decarbonisation process.

ne: Why is that?

Matthes: I am optimistic for two reasons: if you had asked me in 1995 whether renewables would reach a 36-percent share of the electricity mix, I would have replied “never”. But that’s not the way it turned out. And as a Berliner, I never imagined that the fall of the wall, which I witnessed in 1989, could ever actually happen. Those things taught me that what was unthinkable yesterday can become reality tomorrow. Climate change can still be stopped. However, something that concerns me greatly is whether the necessary changes can be made gradually, or whether such a far-reaching transformation can only be achieved disruptively.

ne: What is your opinion?

Matthes: I’m not sure, to be honest. There are a few cases where gradual transformation has worked well, such as in the Ruhr region. But one thing is certain: poorly organised, disruptive transitions could in fact lead to the kinds of social upheaval that critics of the energy transition have always warned of, but have so far not occurred as far as I can see. This could lead to serious problems.

ne: One such example is the coal phase-out, as you have already mentioned. Could the transition from combustion engines to electromobility be afflicted by the same kind of issue?

Matthes: Yes, if it occurs in a chaotic manner it will probably cost us thousands of jobs within a very short period of time. There are always losers when a sector or an economic structure is completely transformed. If we do not ensure a gradual transition for these losers, our entire social order will be at stake, with devastating consequences for democracy. In fact, this is true at a global level. That is why for me, climate action is much more than an energy policy issue - it is a socio-political one. We must organise it in such a way that everyone – both those affected by climate change and we, the main culprits – can continue to live in humane and dignified societies.